Escolar Documentos
Profissional Documentos
Cultura Documentos
The term capital assets is defined negatively in Section 39(A)(1) of the Tax Code
as follows:
(1) Capital Assets. the term capital assets means property held by the taxpayer
(whether or not connected with his trade or business), but does not include
stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the
As applied to the real estate industry, the terms capital assets and ordinary
assets are
defined in Section 2(c) of Revenue Regulations (RR) No. 7-2003 dated December 27,
2002. Its
essentially the same as the above definition.
It has an additional provision, though, on real properties acquired by banks through
foreclosure
sales the same are considered as their ordinary assets but banks shall not be
considered as
habitually engaged in the real estate business for purposes of determining the
applicable rate of
expanded withholding tax.
Since we are talking about the sale of real property here, we need to know the
definition of real
property. Section 2(c) of RR No. 7-2003 states that Real property shall have the
same meaning
attributed to that term under Article 415 of Republic Act No. 386, otherwise known
as the Civil
Code of the Philippines. Article 415 of the Civil Code provides:
Thus, it appears that it is not only the sale of land and buildings or houses which we
should be
focusing on, but also the sale of the above.
As RR No. 7-2003 is a very important rule on real estate, I have included the said
regulations in
this post for your reference. Read it in its entirety. You may download a copy here.
Answers to
frequently asked questions can be found in this document.
In simple terms, if the property is not ordinarily held for sale (as inventory) or used
in business
and subject to depreciation, then the property is a capital asset. Now, if a seller is
engaged in the
real estate business, and the property is one he holds out for sale to the public, then
the property
may be considered as an ordinary asset.
[Note that there may be instances when a seller is engaged in the real estate
business but the
property is not held for sale or used in business or was idle for a long time this is
one of the
instances when the property may be considered a capital asset.]
Conversely, if a seller is not engaged in the real estate business, and the property is
not used in
business and subject to depreciation, the property may be considered as a capital
asset, the sale
of which is subject to CGT.
Section 3 of RR No. 7-2003 provides the Guidelines in Determining Whether a
Particular Real
Property is a Capital Asset or Ordinary Asset.
Tax Rate to be Used
When the real property which is a capital asset to the seller is sold, the gross selling
price or fair
market value (FMV) [zonal value], whichever is higher, will be subject to 6% CGT.
Please refer to